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CMBIS Research 19 Dec 2019 CMB International Securities | Equity Research | Company Initiation Perfect World (002624 CH) Game leader with valuable IPs BUY (Initiation) Target Price RMB48.9 Up/Downside +19.3% We expect Perfect World (“PW”) to keep its solid game momentum and see Current Price RMB41.0 potential entertainment recovery, backed by valuable IPs, strong development team and high-quality productions. We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E. Initiate with BUY with DCF-based TP RMB49. China Internet Sector Sophie Huang A leading game & entertainment player with valuable IPs. As a PC game (852) 3900 0889 pioneer, PW successfully transferred its strategic focus on mobile games, and [email protected] developed notable IP-based titles, such as New Jade Dynasty Mobile (新诛仙) and Perfect World Mobile (完美世界手游). We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E, thanks to its solid game and Stock Data entertainment pipeline. Mkt Cap (RMB mn) 51,514 Avg 3 mths t/o (RMB mn) 421.2 Game: rich game portfolio to maintain strong momentum. Backed by 52w High/Low (RMB) 41/22.6 valuable IPs and strong development team, PW had rich game pipeline in Total Issued Shares (mn) 1,293 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, New Source: Bloomberg Forsaken World (新神魔大陆), etc. We expect its rich game pipeline will Shareholding Structure continuously boost ongoing growth in 2020E, supported by stepping-up new Perfect World 35.1% games introduction and launch. We forecast its game sector to grow 23%/14% DQ JunYang Ent 11.9% Chi Yufeng 10.2% YoY in FY19/20E, in which PC/ mobile games to deliver 5%/39% YoY growth Source: Bloomberg in FY19E. Share Performance Entertainment: more high-quality productions to come. Film industry in Absolute Relative China faces multiple challenges in 2019, including flat industrial growth and 1-mth 32.1% 28.4% tightening regulations on celebrity, content and pipeline. Given recent film 3-mth 35.3% 34.3% 6-mth 62.3% 48.8% headwinds, we expect PW’s entertainment segment to bear pressure in Source: Bloomberg FY19E, but keep positive on it recovery in FY20E, supported by its strong pipeline with high-quality TV dramas and movies. 12-mth Price Performance (RMB) Initiate with BUY. We initiate BUY with DCF-based TP of RMB49, implying 45 002624 CH SHSZ300 (rebased) 26.7x P/E in FY20E. We think the majority of PW’s solid FY19E financials 40 have been partly priced in, and PW’s positive price drivers and catalysts 35 30 originate from: 1) further performance of new games; and 2) stepping-up 25 contribution from entertainment after regulation headwinds. 20 15 10 Earnings Summary Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 (YE 31 Dec) FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 7,930 8,034 8,651 9,945 11,056 Source: Bloomberg YoY growth (%) 28.8 1.3 7.7 15.0 11.2 Net income (RMB mn) 1,505 1,706 2,086 2,410 2,719 EPS (RMB) 1.14 1.30 1.59 1.83 2.07 YoY growth (%) 29.0 13.4 22.3 15.5 12.8 P/E (x) 35.8 31.6 25.8 22.4 19.8 P/S (x) 6.8 6.7 6.2 5.4 4.9 Yield (%) 0.4 0.4 0.5 0.6 0.7 ROE (%) 17.5 20.2 18.7 18.5 17.6 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 Dec 2019 Investment Summary Widely-anticipated IP reserve to deliver ongoing pipeline Leveraging valuable PC IPs to boost mobile momentum We see high visibility for PW to continue develop high quality and selective hot titles, backed by its valuable PC IP reserve. Since 2013, PW has begun to transfer its strategic focus on mobile games from PC games, and successfully developed notable PC IP-based titles, such as New Jade Dynasty Mobile <新诛仙>, Perfect World Mobile <完美世界手游>， and Return of the Condor Heroes 2 <神雕侠侣 2>. Moreover, most of its hot titles have long lifecycle. Figure 1: PW’s key titles Source: Company, CMBIS Figure 2: PW’s PC game in operation No Title Chinese Title Type Launch Date 1 Jade Dynasty 3 诛仙3 MMORPG 2007 2 PW International 完美国际 MMORPG 2006 3 Swordsman 笑傲江湖 OL MMORPG 2013 4 My Own Swordsman 武林外传 MMORPG 2006 5 Forsaken World 2 神魔大陆 2 MMORPG 2013 6 Fantasy Jade Dynasty 2 梦幻诛仙 2 MMORPG 2009 7 Redcliffe 赤壁 MMORPG 2008 8 Creation chariots 创世战车 FTG 2019 9 The Mummy 神鬼传奇 MMORPG 2009 10 War of the Immortals 神鬼世界 MMORPG 2010 11 Perfect World 完美世界 MMORPG 2005 12 Condor Heroes 神雕侠侣 MMORPG 2012 13 Dance party MAX 热舞派对 MAX Social Casual 2008 14 Pocketpet Journey West 口袋西游 MMORPG 2008 15 CS:GO CS:GO RTS 2012 16 DOTA 2 DOTA 2 MOBA 2013 Source: Company data, CMBIS PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 19 Dec 2019 Figure 3: PW’s mobile game in operation No Title Chinese Title Type Grossing Rank Launch Date 1 Jade Dynasty Mobile 诛仙手游 MMORPG 4 2016.09 2 Perfect World Mobile 完美世界手游 MMORPG 1 2019.03 3 My Own Swordsman Mobile 武林外传官方手游 MMORPG 3 2018.05 4 Condor Heroes 2 神雕侠侣2 手游 MMORPG 6 2019.07 5 Reincarnation 轮回诀 RPG 30 2018.04 6 Feng Long Zhan Ji 封龙战纪 MMORPG 63 2019.01 7 The Legend of The Condor Heroes Mobile 射雕英雄传手游 MMORPG 5 2017.06 8 The Legend of The Condor Heroes 3D 射雕英雄传 3D MMORPG 9 2016.03 9 Dream book 梦间集 Simulation 61 2017.07 10 Torchlight 火炬之光 MMORPG 66 2016.12 11 Final Fantasy Awakening 最终幻想 · 觉醒 MMORPG 5 2016.12 12 Heavenly Sword Dragon Slaying Saber 倚天屠龙记 MMORPG 8 2016.05 13 Legend of Condor Hero Mobile 神雕侠侣手游 MMORPG 11 2015.01 14 The Flame's Daughter 烈火如歌 MMORPG 26 2018.04 15 My Origin 我的起源 Sandbox 48 2019.11 16 Yun Meng Si Shi Ge 云梦四时歌 RPG 6 2019.05 Source: Company data, App Annie, CMBIS Flagship of <Perfect World Mobile> to contribute meaningful revenue in FY19E <Perfect World Mobile> gained tractions and ranked Top 10 grossing game since it was launched in Mar 2019. We believe the eye-catching performance of < Perfect World Mobile > could be a notable case to show its self-development ability and monetization potential of reputable IPs. PW will further develop and release its new generation of PC/console version, and we are bullish on its continuous contribution from this IP. We expect <Perfect World Mobile> to contribute 26% of total mobile game revenue in FY19E. Figure 4: iOS grossing rank of <Perfect World Mobile> Source: App Annie, CMBIS Not only MMORPG, but more… We expect PW’s game category expansion to enrich its game portfolio and deliver ongoing contribution. PW had rich experience in MMORPG games development. Apart from MMORPG, PW continuously explores diversified game types, such as SLG, CCG, female- oriented games. For instance, <Dream Book>, as PW’s self-developed female-oriented game performed well quickly, and PW plans to leverage this IP to incubate more versions. PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 19 Dec 2019 Stepping up game development to maximize IP monetization We believe PW’s solid R&D team and stepping-up investment play key role in well-known game development. In 2018, PW had a R&D team with 2,823 developers, accounting for 66% of total employees. Moreover, its R&D/rev ratio were around 25% in the past three years, higher than industrial average (18%). Figure 5: PW’s R&D team Figure 6: R&D expenses 2900 70% 1.6 （RMB bn） 35% 1.4 2800 60% 30% 1.2 50% 25% 2700 1 40% 20% 2600 0.8 30% 15% 0.6 2500 20% 10% 0.4 2400 10% 0.2 5% 2300 0% 0 0% 2016 2017 2018 2016 2017 2018 1H18 1H19 No. of R&D employees As of total employees R&D expenses % of total revenue Source: Company data, CMBIS Source: Company data, CMBIS Rich game portfolio with great monetization potential Backed by valuable IPs and strong development team, PW had rich game pipeline in 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, etc. PC games also see strong titles in pipeline, including New Fantasy Zhuxian (新诛仙世界), Perfect World (完美世界主机版). etc. We expect its rich game pipeline will continue boost ongoing growth in 2020E, supported by stepping-up new games introduction and launch (e.g. New Forsaken World (新神魔大陆), Meng Jian Ji Tian'e Zuo(梦间集天鹅座), New Fantasy Zhuxian(梦幻新诛仙)). Mobile games to maintain strong momentum We are bullish on PW’s mobile game revenue growth in FY19E. We forecast its mobile games to grow 39% YoY in FY19E, given its strong pipeline and newly-launched hot titles. In particular, we expect Perfect World Mobile ( 完美世界手游) and Zhuxian(诛仙) to contribute revenue significantly (accounting for 48% of total mobile game revenue in FY19E), due to 1) their high quality graphic effects, 2) innovative features based on its profound understanding of players, and 3) reputable IP and cooperation with Tencent. Figure 7: PW’s game revenue estimate Figure 8: PW’s mobile game revenue estimate 9000 (RMB mn) 30% 6000 (RMB mn) 50% 8000 25% 5000 40% 7000 20% 30% 6000 4000 15% 5000 20% 10% 3000 4000 10% 5% 3000 2000 0% 0% 2000 1000 -10% 1000 -5% 0 -10% 0 -20% FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E Game re venue YoY Mobile game YoY Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6 19 Dec 2019 In 4Q19, ReEvolve (我的起源), a sandbox game distributed by Tencent, performed well after launch, with iOS grossing rank at ~30 in game category.
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